March 22 - The Wall Street Journal (Jesse Eisinger): "Debt investors expect
prices in the market to be stable and returns to be meager for as far as the
eye can see. So they are coming to a natural conclusion: It is time to borrow
more money and make riskier bets. That type of thinking is often dangerous.
Investors make these bets mainly through esoteric products designed by Wall
Street math whizzes to spread the risk of owning debt. These products bundle
bunches of loans and slice them up into less-risky and more-risky sections
that are sold to investors. The problem is that nobody knows just how much
the few investors who buy the riskiest portions stand to lose if things go
badly. These are the folks who bet, say, $1 million and stand to gain $10 million
-- or lose $5 million or so. Such highly leveraged bets are being taken in
products that lack transparency. Nobody knows how much is at risk in the entire
market if there is a big blowup."

Freddie Mac posted 30-year fixed mortgage rates declined 2 bps to 6.32%, up
31 basis points from one year ago. Fifteen-year fixed mortgage rates dipped
one basis point to 5.97% (up 41 bps in a year). One-year adjustable rates,
however, rose 4 bps to 5.41%, an increase of 117 bps over the past year. The
Mortgage Bankers Association Purchase Applications Index declined 2.3% last
week. Purchase Applications were down 13.8% from one year ago, with dollar
volume 11.7% lower. Refi applications dipped 0.6%. The average new Purchase
mortgage declined to $230,600, while the average ARM slipped to $341,900.

Total Money Market Fund Assets, as reported by the Investment Company Institute,
jumped $15.2 billion last week (week ended March 22) to $2.055 Trillion. Money
Fund Assets are down $1.6 billion y-t-d, with a one-year gain of $149 billion
(7.8%).

Total Commercial Paper dipped $0.3 billion last week to $1.711 Trillion. Total
CP is up $62.3 billion y-t-d (12wks), or 16.4% annualized, while having expanded
$261.8 billion over the past 52 weeks, or 18.1%. Last week, Financial Sector
CP borrowings were unchanged at $1.577 Trillion (up $68.4bn y-t-d), with a
52-week gain of $272.7 billion, or 20.9%. Non-financial CP declined $0.3 billion
to $134.8 billion, with a 52-week decline of 7.5%.

Fed Foreign Holdings of Treasury, Agency Debt ("US marketable securities held
by the NY Fed in custody for foreign official and international accounts")
declined $8.0 billion to $1.587 Trillion for the week ended March 22. "Custody" holdings
were up $67.9 billion y-t-d, or 19.4% annualized, and $198 billion (14.3%)
over the past 52 weeks. Federal Reserve Credit added $0.8 billion last
week to $821 billion. Fed Credit has declined $5.6 billion y-t-d, or 2.9% annualized.
Fed Credit expanded 4.8% during the past year.

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - are up $174 billion y-t-d (18.6% annualized) and were up $463
billion, or 12.3%, over the past 12 months to a record $4.220 Trillion.

The dollar index rose 1.3% this week. On the upside, the South African rand
gained 0.5%, the Uruguay peso 0.2%, and the Indonesian rupiah 0.2%. The old
favorite higher yielding currencies were under heavy ("yen carry"?) liquidation.
For the week, the Iceland krona dropped 5%, the New Zealand dollar 2.6%, the
Hungarian forint 1.6%, the Czech koruna 1.6%, and the Australian dollar 1.6%.

Commodities Watch:

March 21 - Bloomberg (Claudia Carpenter): "Orange-juice futures in New York
rose to their highest price since 1992 on speculation the government will reduce
its estimate of Florida's orange crop because of damage from dry weather. Florida
is the world's second-biggest grower."

Copper and zinc traded this week to new record highs. May crude rose 6 cents
to $64.26. April Unleaded Gasoline jumped 3.4%, and April Natural Gas gained
1.3%. For the week, the CRB index added 0.4% (y-t-d down 1.5%). The Goldman
Sachs Commodities index rose 0.4%, going slightly in the black for 2006.

Japan Watch:

March 23 - Bloomberg (Lily Nonomiya): "Japanese imports gained the most in
almost a decade, narrowing the trade surplus, on demand from consumers and
companies as the economy headed for its longest postwar expansion. Imports
jumped 30 percent in February from a year earlier, causing the surplus to narrow
11.8 percent to 955.7 billion yen ($8.2 billion)... Exports rose 21 percent,
the fastest in nine years."

March 24 - Bloomberg (John Brinsley): "Japan's service industries expanded
in January by more than double the pace expected as wages rose and companies
increased spending, suggesting the economy will keep growing in the first quarter
of the year. The tertiary index rose 2.2 percent in January from December..."

March 23 - XFN: "The average price of land in Tokyo rose for the first time
in 15 years in 2005, according to an annual Japanese government survey... The
survey conducted by the Ministry of Land, Infrastructure and Transport showed
that the average price of residential property in the capital rose 0.8% in
2005 while the average price of commercial land increased 2.9% from a year
earlier."

China Watch:

March 22 - Financial Times (Richard McGregor and Geoff Dyer): "China will
take measures to meet US complaints about their bilateral trade imbalance as
part of next month's trip to Washington by Hu Jintao, Chinese president, but
has warned the US also to take responsibility for its economic problems. Wen
Jiabao, China's premier... promised new initiatives on issues such as abuse
of intellectual property rights, a long-running complaint of investors. "But
it is unfair for the US to scapegoat China for the US's own structural economic
problems," Mr Wen added...

March 22 - Bloomberg (Allen T. Cheng and Todd Prince): "China aims to more
than double trade with Russia to as much as $80 billion in five years as the
nations increase cooperation in energy, commodities and technology, Chinese
President Hu Jintao said."

March 23 - Bloomberg (Nerys Avery): "Sales by China's top 100 chain store
operators rose 42 percent last year from a year earlier to 708 billion yuan
($87 billion) as they opened more outlets, the China Daily reported"

March 24 - Bloomberg (Nipa Piboontanasawat): "Hong Kong's export growth picked
up in February as trade with China increased after the Lunar New Year holiday.
Overseas sales rose 20.5 percent last month from a year earlier to HK$153.6
billion ($20 billion)..."

March 22 - Bloomberg (Patricia Kuo): "Hong Kong prime office rents may jump
30 percent this year to record highs after new supplies fell to a 35-year low,
the South China Morning Post reported."

Asia Boom Watch:

March 22 - Bloomberg (Kartik Goyal): "The Indian government expects exports
to reach $100 billion, exceeding an earlier target, by the March 31 end of
the fiscal year, Trade Minister Kamal Nath said... India's economy is growing
at a fast pace of more than 8 percent per year,' the minister said... 'Our
exports have been growing at 26 percent per year for the past two years and
will most likely touch $100 billion this year.'"

March 23 - Bloomberg (James Peng): "Taiwan's export orders in February rose
at the fastest pace in more than a year, led by demand for notebook computers
and semiconductors. Orders, indicative of actual shipments in one to three
months, gained 25 percent from a year earlier after climbing 20 percent in
January..."

March 24 - Bloomberg (Seyoon Kim): "South Korea's consumer confidence climbed
to its highest in almost four years in the first quarter, adding to evidence
that citizens are poised to increase spending."

March 22 - Bloomberg (Stephanie Phang): "Malaysia's central bank said economic
growth will accelerate to 6 percent, more than analysts expected, on higher
electronics and oil exports and government spending. Inflation may rise to
an eight-year high."

March 21 - Bloomberg (Aloysius Unditu): "Indonesia's economy may expand as
much as 6.4 percent next year due to rising foreign investment, Finance Minister
Sri Mulyani Indrawati said."

March 20 - Bloomberg (Andreas Scholz and John Fraher): "European Central Bank
Chief Economist Otmar Issing said the bank can't ignore the inflation risks
posed by the increase in the availability of money in the dozen nations sharing
the euro. 'A large liquidity build up has developed and we can't ignore it,'
said Issing... 'In the last quarter, growth has moderated, but we can't forget
what's already happened.'"

March 20 - Bloomberg (Gabi Thesing): "German producer-price inflation accelerated
in February to the fastest pace in almost 24 years, led by a surge in energy
costs. Goods from plastics to newsprint were 5.9 percent more expensive in
February than at the same time last year..."

March 21 - Bloomberg (Simon Kennedy and Simone Meier): "French consumer spending
jumped in February by the most since October 2004, suggesting Europe's third-largest
economy is gathering speed after a fourth-quarter slowdown."

March 21 - Bloomberg (Hugo Miller): "Swiss watch exports rose 9.5 percent
in February from a year earlier as watchmakers including Swatch Group tapped
rising demand among wealthy Asian consumers and shipments to Germany recovered."

March 22 - Bloomberg (Brian O'Neill): "Irish house prices rose an annual 11
percent in February, the fastest pace in 18 months, as population growth and
rising employment underpinned demand for property, according to a survey by
Irish Life & Permanent Plc. House prices rose 1 percent from the previous
month to an average of 284,096 euros ($343,000)..."

March 23 - Bloomberg (Tracy Withers): "New Zealand's annual current account
deficit widened to a record in the fourth quarter as soaring oil prices and
increased consumer demand drove up the value of imports, outpacing growth in
exports. The annual gap widened to NZ$13.69 billion ($8.6 billion) from a revised
NZ$12.99 billion in the year through September..."

March 24 - Bloomberg (Tracy Withers): "New Zealand's economy contracted for
the first time in more than five years in the fourth quarter as record-high
interest rates slowed household spending and stalled business investment. The
economy shrank 0.1 percent from the third quarter, when it grew a revised 0.1
percent..."

March 23 - Bloomberg (Nasreen Seria): "South Africa's current account deficit...
widened to a record in the fourth quarter... The deficit widened to a seasonally-adjusted
71.6 billion rand ($11.3 billion), or 4.5 percent of gross domestic product..."

Latin America Watch:

March 23 - Bloomberg (Patrick Harrington): "Mexico's exports rose in February,
led by a surge in oil exports and automobile sales in the U.S. market. Exports
rose 22 percent to $18.8 billion from $15.4 billion a year earlier, following
a 36 percent increase in exports in January... The country's trade surplus
widened to $461 million..."

March 21 - Bloomberg (Guillermo Parra-Bernal): "Brazilian retail sales surged
in January at the fastest pace in 10 months as rising wage levels in the country's
major metropolitan regions stoked spending on clothing and food. Retail, supermarket
and grocery store sales, as measured by units sold, rose 6.54 percent in January..."

March 23 - Bloomberg (Matthew Walter): "Chile's economy grew faster than economists
expected in the fourth quarter, as prices for copper, the country's top export,
rose to records. Gross domestic product grew 5.8 percent in the fourth quarter
from a year earlier..."

Bubble Economy Watch:

February Existing Home Sales (EHS) bounced back to a robust and stronger-than-expected
6.91 million annualized pace. February EHS were about flat from a year ago,
with Average (mean) Prices up 6.7% to $256,000. EHS was up 7% from two years
ago, with Prices up 19%. Conversely, February New Homes Sales were a much weaker-than-expected
1.08 million annualized. Sales were down 13.4% from January 2005, with Average
Prices up 2.6% to $296,700. The mounting Inventory of New Homes jumped another
20,000 to a record 548,000, up 22.9% from January 2005, to a 6.3 months supply.

March 20 - Bloomberg (Andrew Ward): "Commercial construction, one of the last
industries to recover from the most recent recession, is poised for the best
year since 2001, contributing more to economic growth just as homebuilding
starts to ebb... Job growth and falling vacancy rates may push investment in
non-residential construction up 9 percent this year to $531 billion, the most
since at least 2001, according to the Associated General Contractors of America..."

March 23 - The Wall Street Journal (M.P. McQueen): "The hurricanes that ravaged
the Gulf Coast last summer are beginning to wreak havoc with homeowners' insurance
coverage in states far removed from where the storms hit. Still reeling from
an estimated $56 billion of hurricane-related losses, major insurers are dropping
policies or not writing new ones in coastal areas from Texas to Florida and
up the Eastern Seaboard... Insurers including Allstate Corp. and Nationwide
Mutual Insurance Co. say they need to reduce the financial risk... Allstate,
the nation's second biggest home insurer...says it plans to seek premium increases
in a 'majority' of the 49 states in which it does business... The company recently
raised home-insurance premiums by 8.5% in New York state and says it plans
soon to ask regulators in Connecticut and New Jersey to approve rate increases."

Mortgage Finance Bubble Watch:

Freddie Mac's Book of Business expanded $19.2 billion, or 13.5% annualized,
during February to a record $1.722 Trillion. Freddie's Book of Business surged
$198 billion, or 13%, over the past year. The company's Retained Portfolio
expanded at 2% rate during the quarter to $705 billion, with a 12-month gain
of 7.8% (up $51bn). Outstanding MBS expanded at a 21.7% rate during the month
to $1.107TN, with a 12-month gain of 16.9% ($147bn).

Fannie Mae's Book of Business expanded $13.4 billion, or 6.9% annualized,
during February to a record $2.351 Trillion. Fannie's Book of Business was
$44 billion over the past year, or 1.9%. Fannie's Retained Portfolio contracted
at a 7.4% pace during the month to $720 billion (down $154bn y-o-y). Outstanding
MBS expanded at a 13.3% rate during the month to $1.631 TN, with a y-o-y gain
of $199 billion (13.9%).

March 23 - Bloomberg (Lucian Kim): "OAO Rosneft, Russia's state oil company,
will spend $30 billion in the next decade to increase production after the
country's output growth slowed last year. Rosneft plans to buy new fields,
Chief Executive Officer Sergei Bogdanchikov said... The company plans an initial
sale share in July that may raise a record $20 billion."

Speculator Watch:

March 22 - Financial Times (Stephen Schurr): "Hedge fund investors expect
the amount they put in to such funds to increase by 28 per cent this year,
according to a survey by Goldman Sachs... Global macro and equity long-short
strategies are expected to see the greatest increase in capital allocation
by asset weight, the study found."

The Flow of Finance:

Question from Representative Mark Kennedy: "As you know, our nation's trade
deficit continues to be an issue that is a focal point of many in Congress.
While various views have been put forth about how to interpret the numbers
by the Commerce Department in recent years, last year you proposed an alternative
view as to the likely cause of the U.S. trade deficit. Specifically, you
have indicated that the trade deficit is largely dependent on the saving
surplus in developing countries. In essence, a big part of the trade deficit
and [current] account deficit is because the rest of the world wants to invest
in the U.S., because of our dynamic and rapidly growing economy and the returns
on investment our economy is capable of generating. With our trade deficit
for 2005 having just been reported, do you still see your analysis as an
accurate portrayal of our country's trade imbalance?"

Written response from Fed chairman Bernanke: "As indicated by the question,
in my March 2005 speech, "The Global Savings Glut and the U.S. Current Account
Deficit," I identified the excess of notional saving over investment rates in
the developing countries as a major factor underlying the large U.S. current
account deficit. The speech proposed several reasons for why the current
account balance of developing countries had swung into surplus, including
the reaction of developing Asian economies to the financial crisis of 1997-98
and the effect of rising oil prices on the revenues and trade balances of
the oil-exporting countries. Nothing has occurred since March 2005 to diminish
support for the "global saving glut" hypothesis, and the factors contributing
to this 'glut' generally remain in place. The U.S. trade deficit has widened
$106 billion between 2004 and 2005, but the surplus of the developing economies
is generally estimated to have widened as well. Much of the widening of the
U.S. deficit and of the developing country surplus is attributable to higher
oil prices - a factor identified in my March speech. Additionally, U.S. economic
growth again exceeded that of a trade-weighted average of industrial economies
in 2005, thus continuing to support the relative attractiveness of investments
in the United States."

I suppose it was wishful thinking on my part that Dr. Bernanke's "global saving
glut hypothesis" (propaganda) had been quietly left behind at the office of
the President's Council of Economic Advisors. Such analysis is certainly not
befitting of the Chairman of the Federal Reserve.

ECB Chief Economist Otmar Issing, quoted earlier in the week in a Bloomberg
interview: "A large liquidity buildup has developed and we can't ignore
it. In the last quarter, [ECB money] growth has moderated, but we can't
forget what's already happened.'"

March 24 - Bloomberg (Matthew Brockett): "European Central Bank Chief Economist
Otmar Issing comments...on money supply growth and asset prices: 'You
can't ignore developments in money and credit.' The issue of asset price increases
'for me is one of the biggest challenges of central banks of our time:
how to deal with that. We are far from final answers... One of the advantages
of our strategy, which is now more and more recognized, is that there's hardly
any development in asset prices which can't be' connected 'to developments
in money and credit. So giving money and credit a strong role in your analysis
is forcing you to take account of that...' The ECB says it bases interest
rate decisions on the two 'pillars' of analyzing the economy and money supply,
and Issing has advocated a policy of 'leaning against the wind' to avoid asset
price bubbles."

Mr. Bernanke refers sanguinely to a "global savings glut," while the astute
Mr. Issing frets over a "large liquidity buildup." Bernanke discusses conveniently
ambiguous concepts such as "excess saving over investment rates." But what,
may I inquire, is the role played these days by "saving" in an integrated financial
world of unconstrained Credit expansion and massive Financial Flows. And how
might we define, account for and analyze contemporary "investment," anyway?

Conversely, Issing speaks directly to the risks associated with rapid liquidity
expansion. Disregarding "money" and Credit, Dr. Bernanke and the (Greenspan)
Federal Reserve erringly claim that it is impossible to identify Bubbles until
after the fact. Their purposefully nebulous analytical framework has no place
for Financial Flow analysis. Conversely, Dr. Issing clearly articulates that "asset
price bubbles" are a phenomena connected to observable "developments in money
and Credit." Here, the Flow of Finance is fundamental.

Traditionally, a dearth of savings eventually imparted restraint on economic
booms (and financial speculation!) through the rising cost and limited availability
of finance (surging interest rates and liquidity crises!). At some point, borrowings
would be moderated, spending restrained, speculation squelched, and saving
augmented. Interest rates and the attendant Flow of Finance were fundamental
facets of the system's adjusting and self-correcting mechanism. Some of the
more insightful business/Credit cycle analysis (i.e. Hyman Minsky) was predicated
on the Credit boom inevitably meeting its demise at the hands of the funds/"money" market.
Frenetic and increasingly speculative ("Ponzi") demand for borrowings - within
a system dictated by a bounded supply of "saving"/funds - would ultimately
push market rates to levels too onerous for a progressively fragile financial
apparatus.

Well, finance now operates with a decisive difference: the expansive market
for finance (interconnected Credit systems worldwide) is fully integrated globally
and operates on the basis of the unlimited capacity to create additional funds/liquidity/Credit.
In the case of the U.S. - the champion of contemporary liquid and highly-rated
Credit "money" creation and intermediation - domestically created liquidity
Flows in abundance internationally, only to be effortlessly recycled right
back to "money"-like debt instruments (Treasuries, agencies, MBS, ABS, "repos," CP,
etc.). The "recycled" liquidity then provides the basis for only further lending
excess, priced at a small spread to whatever level the Fed has pegged money
market rates.

Within the ballooning pool of available global finance, there can be no delineation
between wholesome "saving" and infectious speculative-based liquidity. The
historic slow-motion evaporation of U.S. saving has imparted no restrictive
influence on American or international funds availability or placed upward
pressure on rates. "Crowding out" has been proven an urban myth. No amount
of borrowing for the purposes of asset speculation has impinged upon the supply
of finance; quite the contrary, with speculative leveraging continuing to be
a crucial facet of both new global liquidity creation and speculative Financial
Flows.

There may be today greater recognition of the global nature of the pool of
liquidity (and its influence on rates and yield curves generally), yet there
is at the same time dreadful appreciation as to the nature of its creation.
When it comes to liquidity, there is no chicken and egg dilemma. It is the
expansion of Credit - the creation of new liabilities by a "deficit unit" when
borrowing - that creates new financial claims/purchasing power for the holder
of the new "liquidity" ("surplus unit"). The Unending Flow of Dollar Balances
inundating the world is not coming into existence out of thin air, but is the
residual of borrowings undertaken by American households, government units,
financial institutions, corporations and financial speculators.

If global trade was dictated by the exchange of goods for goods, we would
not enjoy the capacity of running massive Current Account Deficits. And there
would be no need for the U.S. (and other "deficit units") to issue new Credit
instruments (Credit Inflation) to consummate import purchases. There would
be no massive global "liquidity buildup" and no marketplace perceptions of
endless cheap liquidity. Central bank policy would not be governed by the fear
of bursting Bubbles, and the global financial landscape would be unrecognizable
from the present.

Cumulative ongoing (chiefly U.S.) Current Account Deficits are the root source
of the unprecedented global pool of liquidity that is today fueling Asset Inflation
and Bubbles the World Over. Dr. Bernanke can adhere to a sanguine view only
because the current Global Flow of Finance is concurrently financing ongoing
massive investment of goods producing capacity (especially throughout Asia)
- with attendant restrained goods prices - and almost across-the-board Asset
Inflation. He is left to only hope that a "precipitous" decline in the dollar
is "unlikely," and that the U.S. economy would withstand a dollar crisis of
confidence.

Dr. Issing, on the other hand, has very good reason to agonize. He appreciates
that this massive buildup of global liquidity is highly unstable and controllable
only as long as unsustainable Flows of Finance and asset inflation are sustained.
His focus is where it should be, on the intermediate and longer-term. Not only
is the primary source of The Flow of Finance suspect (unsustainable U.S. asset
Bubbles, American over-consumption and problematic international imbalances,
along with global leveraged securities speculation). Inevitably, the ballooning
pool of speculative finance ensures that this Flow of Finance becomes over
time only larger, more unwieldy and increasingly destabilizing. Observing how
abruptly Flows to Iceland have reversed, an arguably unavoidable reversal away
from U.S. securities would prove quite problematic to the U.S. Bubble economy.
It would also put the entire global Credit apparatus at risk.

There exists today the delusion that the costs associated with dismal U.S.
saving and spending habits, as well as financial leveraging, are negligible.
The Fed is narrowly fixated on core consumer prices, an essentially irrelevant
indicator of both contemporary Credit Inflation and liquidity conditions. Credit
Inflation's prominent materialization is instead the manifestation of today's
destabilizing Flows of Finance at home and abroad. The Fed is pursuing an unachievable
goal of sustaining the U.S. boom by raising the cost of borrowing at the margin.
But such accommodation of the current Credit boom only ensures self-reinforcing
massive Flows of Finance and attendant Credit and Asset Bubbles around the
globe.

I find the increasing discussion of the Fed's tendency to "overshoot" misguided.
In late-stage Credit and Economic Bubbles, the Flow of Finance dictates system
behavior much more materially than interest rates changes at the margin. As
we have witnessed, baby-step rate increases are ineffective in restraining
the manic frenzy of lending and speculating excess. Instead, it is the Unwieldy
Flows of Finance that notoriously "overshoot," inundating sectors and asset
markets and introducing problematic speculative dynamics. We witnessed as much
during late-1999 and early 2000 throughout the technology Bubble. The marketplace
thumbed its nose at Fed "tightening," spellbound instead by the prospect of
chasing hot stocks, squeezing shorts, and with general marketplace shenanigans
and manipulation. Amazingly, when the highly speculative and destabilizing
Flow of Finance eventually reversed and the bust emerged, many blamed the carnage
on the Fed for needlessly raising rates.

It is the nature of the scope and speculative component of contemporary Flows
of Finance that dictate that time is very much of the essence. Specifically,
it is incumbent upon central bankers to move early and with sufficient conviction
to impede speculative leveraging and interrupt the Flow of Finance to asset
markets. The alternative is a runaway Bubble, popular delusions of grandeur,
and resulting policymaker paralysis and duplicity. With a flawed analytical
framework and the wrong policy focus, the Fed is content to move late and timidly.
Not only has this not restrained excess, it has in fact cultivated and bolstered
Dysfunctional Monetary Processes and their Destabilizing Flows of Finance.

It is my view that the Global Credit Bubble - with the magnitude and mobility
of its pool of speculative finance - has reached the point where efforts to
stabilize international asset markets are quite likely to prove futile. It's
boom or bust, depending on The Vagaries of The Crowd's Greed and Fear and the
resulting direction of The Flow of Finance. It is also worth noting that liquidity-driven
and short-term oriented speculative Bubbles can be expected to be, at least
for awhile, oblivious to unfolding geopolitical risks - almost to the point
where it is perceived that they don't matter. They do. Untenable global imbalances,
heightened global trade tensions, increased "finger-pointing" and "scapegoating," and
a risky deterioration in prospects for stability throughout in the Middle East,
to name just a few, have created a highly uncertain backdrop seemingly on a
collision course with global financial Bubbles.